An Interview with Juan Vegarra, CEO of Vena Resources (VEM.to)

Juan Vegarra; a hands-on CEO

Juan Vegarra is the CEO of Vena Resources (VEM.to). As well as being a site sponsor, regular readers know that VEM.to is a junior mining company I’ve liked for a long time (long before the company started advertising here, in fact). So when given the chance to get this exclusive interview with Juan Vegarra over the weekend I jumped at it; this fascinating look at the world from the eyes of a junior mining CEO in the midst of the sector downturn is the result. Enjoy.

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Otto Rock: Hello, Mr. Vegarra, thanks for agreeing to do this interview with IncaKolaNews.

Juan Vegarra: My pleasure, you know I have been reading your comments for several months and find your site one of the most instructive out there – keep up the great work. I hope you and your readers realize that there may be some issues that I may not be able to expand completely due to the legal restrictions, but I will be as transparent as possible.

Otto: Straight down to business: It’s been a rough time for junior resource stocks recently. How is Vena coping with the circumstances?

JV: Recently we put out a press release explaining how we are allocating our resources with some detail. Bottom line the financial meltdown has created a huge financial problem for ALL companies not just the mining sector. I look at my personal retirement account and this quarter was just nasty even though it is pretty well diversified. In particular with regards to Vena, the current situation has forced me to reassess some investments, delay others and look at my core team and had to let go of some great people whose projects made no sense continuing to invest until the market recovers again. Specifically;

1) Any kind of exploration in all those early stage projects (24 of them) will be put off indefinitely.

2) We are focused on getting the Azulcocha mine fully permitted (EIA and construction permits) AND increasing its resources by drilling underground and along Azulcocha West. The question about when we build the mill is still being debated, but frankly as long as Zinc stays at historically low levels makes no sense to spend millions to barely break even by milling high-grade ore. Like any business person, I would prefer to invest those precious dollars in projects where we can still see a nice return.

3) One of such projects is what we are doing with Sudamericana de Carbon (SDC). We haven’t announced much recently as we have been reviewing several projects that we want to purchase. More than 12 projects have been reviewed and we know which ones we want to purchase, so now it is a matter of the team closing some of those deals under favorable terms. We will of course have to drill some of these projects to comply with the exchange to confirm resources. Some of these projects are owned by small producers so we should be able to mine some anthracite and sell it to the local market. In fact we already have a well known steel manufacturer in Peru as a key client; we plan to expand our sales to this customer.

4) The Uranium exploration projects are being funded by Cameco. We still have another $5 million dedicated to drilling in the short term to delineate a significant resource. Finally…

5) The projects in Puno – Pucara (gold/copper) and Esquilache (gold/copper/silver) will be explored and exploited with as few incremental funds as possible.

Otto: Vena has plenty of different projects in the pipeline, but significantly they are all in Peru. Can you tell us why VEM only operates in Peru and what advantages that gives you?

JV: I am Peruvian by birth. Yes – I left Peru at a very early age to study in America, but my love for the country is perhaps stronger now than when I was growing up. Sounds strange but as an adult I have come to realize how precious its people and natural resources are. America has been great to me, but there is something about the magnetism of Peru that makes me to want to come back frequently.

From the business perspective, Peru is a rich mining country and still heavily under-explored. I know enough business and political people as well as friends and family that support my efforts, so why would I venture to a different country with mining laws that are not as clear and lack the richness Peru has?. Besides there is no match for Peruvian food anywhere! The business model we use at Vena Resources is to have a highly diversified portfolio of assets across all regions of Peru. If I wanted to invest in another country I would most likely work with a local mining expert and create another junior company. The chances of finding a large deposit in Peru over other countries are simply better by focusing in Peru given the large number of world class deposits already there.

Given the strong focus on Peru and understanding the financial market there well made me work with the Lima exchange people to create a junior sector in the BVL. So after months of efforts, Vena become the first Junior company listed in Lima – perhaps the best corporate decision I have made as the dual-listing allows Peruvian investors to invest in an exploration company focus on running Peruvian mining projects for the benefit of Peruvians (via employment, social responsibility etc). Today more than 35% of all outstanding shares are owned by Peruvian investors and growing every day.

Otto: What about disadvantages of Peru exposure? What are the things that make life more difficult for companies operating there, be that on a macro or company scale?

JV: Like any other developing country you find the same issues – corruption, bureaucracy, lack of knowledge of what exploration is all about amongst the indigenous communities. But, the actual investment environment is pro-mining and there is plenty of intellectual capital at a much lower cost that is highly efficient and professional than most countries. So yes you can write pages about what is wrong with this country, but the risks are significantly offset by the potential rewards. So the “Peru” factor is just another element you must take into consideration when analyzing your investment risk/reward profile.

Your readers may not know this, but Vena was created by 7 experienced engineers with MBAs and we reviewed this industry as a business case before even investing a single dollar. Standard MBA work leads us to create a vision for Vena that is very different from 95% of all exploration companies and the “Peru” factor was actually a positive factor from our research. As an example -- It is much easier to explore for Uranium in Peru than it is in the US.

Otto: If I’m not mistaken, your main projects are the Azulcocha zinc/lead/silver mine that is close to commissioning, the uranium projects in the South of Peru, a recently acquired coal project based in the North of the country and two polymetallic projects in the Puno region. Four very different projects. Can you give us an update on all of those projects, starting with Azulcocha where I believe you’re waiting on a final government permit to get production started?

JV: Allow me to expand a bit on what I said above – Azulcocha already has a measured resource capable of feeding a 500 tpd mill for 5 years. The orebody is open along strike and at depth, and significant funds are being invested by Glencore on the exploration project we call Azulcocha West, just 6 kilometers west of the mine. The internal scoping study we completed over 2 years ago, gave us the green light to purchase a mill and put the project in production. Two issues have caused us to re-evaluate our thinking here. First the significant decline in the price of Zinc (from US$2/lb to under US$0.50/lb in 12 months) makes the project economic by only milling high-grade ore (>15%) so we have decided to expand the resource underground. We are currently reviewing historical data as well as what we know from our drill programs with the goal of defining a new drill program to expand the high grade resources – couple those resources to whatever we may find on Azulcocha West and we can see better economics for building the mill. All the equipment and infrastructure investments have been completed, so it is a matter of getting permits and completing another drill program to expand resources before proceeding to the final stage and “expecting” zinc metal prices to recover in the short term.

Otto: What about the coal project?

JV: Very soon I will be able to share more details what we have been working on, but I gave you the general idea just now. We are about to purchase a group of concessions that have enough anthracite to feed the local market for at least 7 years. These resources are of course non 43-101 compliant, so we will need to do some drill work to comply with the TSX requirements, but the coal seams are so obvious that are currently being mined by small coal miners and it is very possible for us to scale-up the operation thus creating a nice cash flow stream to allow SDC to grow organically.

Otto: The VEM uranium project?

JV: This is perhaps the most significant exploration project for us currently. Its development is fully funded by Cameco so we expect to delineate millions of pounds of U308 over the next two years. The current drill program has significantly exceeded our expectation. We originally thought we might get a resource somewhere around 0.2% and it is closer to 0.4% on average. So our goal is to delineate several high-tonnage, low-grade systems that will feed a central mill somewhere in Puno. I would suggest you read about Cameco’s Inkai deposit in Asia to understand the economics of low-grade/high tonnage systems.

Otto: The polymetals projects at Pucará and Esquilache?

JV: Think of Pucara as a high-grade/low tonnage gold/copper system. Cheap mining costs make this project relatively economic even with these metals prices. Our development approach resembles what we did at Azulcocha. We will drift along the major veins, transporting rock to a nearby mill and making enough money to help us subsidize and perhaps make some money while developing the project. We cannot afford, under current market conditions, to invest heavily on this project as we have larger targets (e.g. Esquilache) but if we can find a way for Pucara to grow organically – why not? Very simple management decision that most other juniors would never take given their business model.

Esquilache is perhaps the most exciting exploration project we have. It is so much easier to explore right next to an old mine. Decades ago – geologists had no clue about Stockworks – Esquilache appears to have several Stockworks and some very significant vein structures. We are awaiting permits to drill this project. There are seven significant mineralized zones, we will drill the Mamacocha zone first and grow from there.

Otto: Can you tell us a little bit more about yourself, Mr. Vegarra? I understand that your background isn’t in the mining sector as such.

JV: I am an Electrical Engineer with an MBA and tons of advance management courses. I worked for Microsoft Corporation in the 1990s leading several teams of engineers in some of the most competitive fights against larger companies at the time. Although I am not a geologist or mining engineer, I know what makes engineers tick and know how to grow operations from the idea stage to significant contribution to the corporate P&L. Ask yourself how many Fortune 500 companies in the US are run by “experts in their field” - very few.

The key for start-ups like Vena is to have strong entrepreneurial skills, surround yourself with people that know a lot more than you on their core competencies and ask for advice. The rest is standard corporate management of human and financial resources. I feel strongly that my blended technical/business skills are better suited in times of crisis to navigate thru these tricky times.

Otto: Would you say that Vena Resources is lacking in deep mining knowledge compared to other junior mining companies?

JV: I have heard that criticism before. I personally don’t have a mining related degree, but my management team and the corporate board is heavily loaded with technical talent, so the key question to ask – can the Vena team pull it off? We have already shown that we can finance the company in very difficult times, we have already shown that we can work with partners 100 times larger than us in a win-win structure that is very protective of our shareholders. Finally you can compare the Vena chart to any other Zinc/Uranium producer/explorer and will see that even under those scenarios the stock price has declined less than most percentage wise. I am not trying to excuse myself or the performance of the stock price, simply pointing out comparables so people reading your site can make a proper evaluation of my team’s (and obviously my) performance.

Otto: Times might be tough for the industry right now but if we look forward, how do you see things shaping up? Is mining going to suffer through 2009 or is there reason to be optimistic about the next 12 months or so?

JV: Let me put my MBA hat to answer this question as I believe global macro-economic events will have more of an influence than anything a miner can do. The US FED is printing/borrowing money like no other time in history as it intends to battle a global recession caused by the financially leveraged world we lived until recently. This deleveraging will continue to cause pain to all industries as hedge funds liquidate positions and pension funds are stuck with non-liquid investments in their portfolios, thus forcing them to liquidate equity positions pushing stock prices to incredible low levels to comply with redemptions or cash calls. So it may take all of 2009 to clean up the global mess.

But as we all learned in business school there is always a bull-market somewhere. The question is – how is this global recession going to play in the metals market? Frankly I see the surge in the US dollar against other currencies to be the result of a temporary “flight to safety” more than anything else. The huge infusion of US dollars has at some point to lead to a devaluation of the US currency to the benefit first of precious metals and then to base metals. China has not stopped growing; yes its growth is slowing but it is still quite significant, and as metal prices force operators to shut down or reduced exploration investment to preserve cash or to mill high-grade ore that can only lead to lower supply and higher prices eventually across all metals. We all know how these cycles work, the question is – how long is it going to last?

Given my believe that precious metals will recover first; we are focusing on Pucara and Esquilache (mainly gold/silver). As base metals recover we will be ready with a fully permitted Azulcocha. Finally – energy needs will not slow down and the “drill-baby-drill” mantra will take years to significantly upset the supply/demand curves on the energy side, so Coal and Uranium will go back up in time (I hope) as we complete our resource delineation programs in both metals over the next two years.

Otto: I noticed an intriguing appointment to your board of directors this year. Could you tell us more about the Romaña-Letts family and why investors that may not know so much about the local Peruvian mining scene should be interested the recent link-up between Vena and that family?

JV: By now it should be clear to your readers what I learned from Bill Gates at Microsoft – “surround yourself with people whose core competency adds value to the enterprise” Roberto and his family are part of the Volcan group, perhaps the largest zinc/silver producer in Peru, and their contacts and knowledge of the Peruvian industry is a great asset for me. Roberto is young and aggressive so I expect to pick his brain and use him as a sounding board as to how Vena’s corporate moves may be perceived by the very tight network of Peruvian miners.

Otto: Of all the assets and projects on board at Vena, which one are you most excited about personally?

JV: Esquilache is by far the most intriguing asset from the exploration perspective. Every junior looks for a world class deposit, and Esquilache appears to have that potential. From the cash flow perspective I think the work we are doing with SDC on the coal side has the most potential in the short term. At the end, the most significant assets are the 30+ geologists that continue to find and advance interesting projects for all of us.

Otto: Thanks again for doing this interview, Mr. Vegarra. Do you have any parting words for readers?

JV: I thank you for letting me share some thoughts. It is hard to put a simple corporate strategy press release, so this format is more conducive to interaction allowing me to emote on how I truly feel about the future of Vena. We are facing some very difficult times, but we are not going to hide in a corner watching the world implode around us. God gave us brains to think strategically, and if it means that we must defer our investments and grow at a slower pace – so be it, but we plan to be around to fight another day. Thank you.

Click here to visit the Vena Resources website.